The tax reform plan is explained as follows: "The President is calling on Congress to undertake comprehensive tax reform that produces a system which is fairer, has fewer loopholes, less complexity, and is not rigged in favor of those who can afford lawyers and accountants to game it.
"He believes we cannot afford to make our deficit problem worse by extending the Bush tax cuts for the wealthiest Americans.
"He also supports efforts to build on the Fiscal Commission’s goal of reducing tax expenditures so that there is enough savings to both lower rates and lower the deficit. Reform should be designed to ask more of those who can afford it while protecting the middle class and promoting economic growth.
"In addition, as he explained in the State of the Union, the President is continuing his effort to reform our outdated corporate tax code to enhance our economic competitiveness and encourage investment in the United States. By eliminating loopholes, reducing distortions and leveling the playing field in our corporate tax code, we can use the savings to lower the corporate tax rate for the first time in 25 years without adding to the deficit."
A January 2011 CBO report on the budget shows the deficit as $1.4 trillion for 2011. In 2013, assuming tax cuts are allowed to expire at the end of 2012, the deficit is $704 billion. Here is the CBO chart:
The deficit will be higher if any of the 2001/2003 tax cuts are extended (I understand that some will believe it will be lower because tax cuts will generate new revenue - see a later post on this one). So, it is always a good idea to look at the fine print for any deficit or revenues table for 2013 and beyond - is it based on current law (tax cuts expire at end of 2012) or is there an assumption that any or all are extended.
Back to the president's tax reform. What does he propose to reduce in terms of tax expenditures? The co-chairs of the Deficit Commission proposed removing all of them (final report, page 29)! President Obama's revenue proposals for FY 2012 include extending and creating some tax expenditures (in addition to cutting some, such as the Section 199 manufacturing deduction and some oil and gas incentives).
What will he cut for the group of taxpayers that get the bulk of the benefit from tax expenditures - individuals? (See 2/11/11 post.) I think he'll need to cut more than indicated in his FY2012 revenue proposals to achieve any serious reduction in the deficit and debt.
What tax reforms would you propose to reduce the deficit?
4 comments:
Yes, tax reforms should be used to close the deficit but cannot be the only means. The deficit is alarming as outlined in THE NATIONAL COMMISSION ON FISCAL RESPONSIBILITY AND REFORM (http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf). Many experts have sounded the alarm on the deficit, I’m not sure anyone wants to listen. It can be compared to the alarmist before the banking crisis, warning of excessive debt with weak collateral. No one listened until it became a crisis with economic consequences. In the deficit, the strength of the American economy is the collateral. Our strength is diminished by many factors including inefficient taxation, both in structure and administration. We must address the deficit with tax reform as one of many tactics.
The 2012 Revenue Proposal report seems at first glance in contradiction to the Fiscal Responsibility (http://www.treasury.gov/resource-center/tax-policy/Documents/Final%20Greenbook%20Feb%202012.pdf )report. After reporting on the grave magnitude of the deficit, the Revenue proposal uses the first 30 pages to discuss increasing tax cuts or programs for individuals and businesses such as expanding the Child Care Credit. Granted, these may be seen as an attempt to stimulate the economy but shouldn’t we be focused on a more effective means?
There are numerous studies by “experts” on addressing the deficit and tax reform. I think reform should begin with leadership willing to make tough decisions despite political consequences.
Yes, tax reforms should be used to close the deficit but cannot be the only means. The deficit is alarming as outlined in THE NATIONAL COMMISSION ON FISCAL RESPONSIBILITY AND REFORM (report). Many experts have sounded the alarm on the deficit, I’m not sure anyone wants to listen. It can be compared to the alarmist before the banking crisis, warning of excessive debt with weak collateral. No one listened until it became a crisis with economic consequences. In the deficit, the strength of the American economy is the collateral. Our strength is diminished by many factors including inefficient taxation, both in structure and administration. We must address the deficit with tax reform as one of many tactics.
The 2012 Revenue Proposal (proposal) report seems at first glance in contradiction to the Fiscal Responsibility report. After reporting on the grave magnitude of the deficit, the Revenue proposal uses the first 30 pages to discuss increasing tax cuts or programs for individuals and businesses such as expanding the Child Care Credit. Granted, these may be seen as an attempt to stimulate the economy but shouldn’t we be focused on a more effective means?
There are numerous studies by “experts” on addressing the deficit and tax reform. I think reform should begin with leadership willing to make tough decisions despite political consequences
What do you think about the article about households now receiving more from the government than they are paying in taxes.
(http://money.msn.com/tax-tips/post.aspx?post=63c403d6-0a2f-4506-a8b8-25124d49889b) I know that statistics and data could be packaged to support just about anything. We don't know what is behind the data or what is included or not but this is one of the few I've seen that isn't bemoaning high taxes with little return. Maybe we are starting to look at the high cost of government programs we want while realizing they cost.
I love reading these Presidential speeches. Where are the details in his tax reform proposal? Why do they always talk about setting up a group to review or study the issues? Do we really need a team of medical professionals and Pentagon officials to make another set of recommendations? The President makes reference to his deficit commission but what parts does he endorse? Whenever I read one of these political speeches I think of the old line Ross Perot use to pull out when he was ruining for office. It goes something like “ Washington is littered with good ideas, just pick one and implement it”. Well here’s another plan. If the deficit commission wants to eliminate all tax expenditures maybe they could redesign the system using the Simple Exact Transparent (SET) tax. This is a plan promoted by the New York State Society of CPAs. The SET tax is described as “a greatly simplified income tax, devoid of unnecessary complexity and alternative tax systems. Congress would select a politically acceptable, economically appropriate single rate to tax all gross income for both individuals and business, and then use only straightforward exclusions of its choosing to accomplish additional public policy goals. An individual’s tax is calculated using this simple, easy-to-understand formula:
(Income – Congressionally defined exclusions) x Rate = Tax.
As I understand it, the design of the system would borrow from the current code to define such items as income to determine a broad base and then apply exclusions crafted by Congress. Basically starting from scratch and eliminating all of the confusing credits, deductions, phase in/outs, recaptures and multiple filing statuses. It sounds simple but how long will it take Congress to add complexity in order to achieve other public-policy goals?
Progressivity is achieved with a generous personal exemption and caps on exclusions.
Compliance is achieved with a single rate only applied to prosperous individuals and companies. Can all this lead to a tax system that is simple, compliant, predictable, and transparent and provide corporate integration and economic growth? Sounds to good to be true.
One claim from the proponents of this tax system is that it will reduce the complexity of measuring tax expenditures. Allowing Congress and the public a greater level of transparency in understanding how the money is used. If President Obama want to use the deficit commission’s plan as a starting point, he could build on there proposal using the SET tax design and move to a better performing tax system with less transition issues. Bottom line, the President should lay out more details on tax reform and lead the nation forward with his charismatic style.
More details on the SET tax are available at: http://www.nysscpa.org/tax_reform/set_tax.htm
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